Puerto Rico in Two Weeks for Two Weeks…or for Twenty Years

Sorry I have been so quiet these last few weeks. I am catching up on a ton of work (which is blessing, I am not complaining). Unless it is absolutely necessary, we are not setting appointments earlier than June 20th. The object is to get caught up before we go to Puerto Rico from June 5th to June 19th.

Why Puerto Rico? Well, there are the beaches, stunning Old San Juan, and the warm (and loud and passionate both when happy & angry) people.

But there is also tax law.

We are considering moving to PR in circa two years and taxes are a key motive. By taxes, I mean cutting mine by over $150,000 per year.

The last scheduled SDIRA/401k Workshop will be in Columbus, OH on Saturday June 3rd & Sunday June 4th. I may do another later in the year, but I presently have neither scheduled nor planned it. These workshops have gone well. Lots of excellent discussion and Q&A….way cheaper than asking on the clock. This one looks to be lightly attended, probably only 12 or so attendees. One is never an expert in his hometown, I always do better with these when I present them “somewhere nice”. My pain is your gain, the small size will allow for more than the usual Q&A and individualized discussion. Did I mention “off the clock”? For more information, see iralawyer.com.

In most cases, leaving the US does not keep the IRS from following you. Unlike most industrialized counties, the US taxes its citizens whether or not they are in the US. If you go to another country and pay less tax than you would have paid in the US, the IRS hits you up for the difference. Nice. Socialism with a long, long arm.

Puerto Rico is an exception. It is one of the few places where the IRS does not tax US citizens. For example, if I perform services (such as providing tax & asset protection legal advice) in PR for people in the US, the service is taxable in PR and not in the US.

Normally that would be a bad thing because, for medium to high earners, PR’s tax rates are higher than the US.

Enter Puerto Rico’s “Act 20”. If one establishes a C-Corporation in PR and employs 5 PR residents whose services are exported outside of PR (e.g. – my tax advice to people in the US), the total tax rate is 4% – that is state, local and federal. If you are in the 40% US federal income tax bracket and live in a place like socialist California (12% top rate), going from a 52% top rate to a 4% flat rate makes for some serious savings. Some highlights & comments:

There are other similar tax incentives. For example, if you live primarily off of dividends & interest (hello hard money lenders!), Act 22 provides a tax rate comparable to Act 20.

“Puerto Rican resident” does not necessarily mean “Puerto Rican”. For example, I can hire a US tax attorney, move her to PR and after 183 days, she is a resident. That’s a good thing, because there probably aren’t very many US tax attorneys for hire in PR. Also, my spouse and I count as “residents”, so if we both work for the company, we need hire only 3 more employees (and maybe not even that many, keep reading).

Because investors would rightly fear the law changing on them (e.g. – repeal of Act 20), the government (which is subject to the US Constitution, or at least what remains of it) enters into a 20-year contract agreeing to apply Act 20.

Some very positive Act 20 changes are almost through the legislature and seem very likely to pass, including:

Elimination of the requirement to hire employees at all, meaning that high-earning, single-man businesses can use Act 20

Special incentives to attract MD’s for local medical tourism as well as export of their services (e.g. – radiologist reviewing X-rays in the US from PR)

Ability to form a trading company (import/export, not just with exports from PR) under the Act

It’s not all milk & honey. PR has some issues. Here are a few:

Puerto Rican culture is very bureaucratic and pro-government – which means anti-business. Sans Act 20, I would not dreamof doing business there. Even with Act 20, attracting & retaining employees is a non-trivial challenge.

I am the son of a Salvadoran immigrant and married to a Chilean immigrant (both legal, I might add). I grew up speaking Spanish and am used to Latin culture. The culture has upsides (passionate, family oriented, squeeze every last drop of joy out of life, incredibly feminine women) and downsides (passionate, corrupt, inefficient, often inconsiderate). Adjusting to it can be jarring, or even impossible, for some.

The island is in crisis. It is our Greece. They spent more than they can pay back (mostly on socialism) and cannot print money to cheat their creditors. As such, they will need to use BK to default, and BK has consequences. The situation also leads to opportunity – see Detroit and its bankruptcy and how investors profited. They do have HUD auctions there….

Hurricanes

Consumer goods & utilities are expensive

High crime, but as in the US, it helps a lot to know where to go/not go

Beautiful Architecture – google “Old San Juan”, make sure there are images. OSJ has street after street of beautiful, old Spanish architecture. Plus Pina Coladas were invented there. It is one of the most beautiful places I have been.

Great food

It is really warm

So we used some of those Southwest Airlines vouchers and booked a family vacation for two weeks. We will get a better feel for the island and its people – and Act 20 via local counsel – and see if it is for us. Worst outcome: Fun trip. Best outcome: Big move, huge reduction in our cost of living.

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